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NBR > SEC Filings for NBR > Form 10-Q on 9-May-2014All Recent SEC Filings

Show all filings for NABORS INDUSTRIES LTD

Form 10-Q for NABORS INDUSTRIES LTD


9-May-2014

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

We often discuss expectations regarding our future markets, demand for our products and services, and our performance in our annual, quarterly and current reports, press releases, and other written and oral statements. Statements relating to matters that are not historical facts are "forward-looking statements" within the meaning of the safe harbor provisions of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). These "forward-looking statements" are based on an analysis of currently available competitive, financial and economic data and our operating plans. They are inherently uncertain and investors should recognize that events and actual results could turn out to be significantly different from our expectations. By way of illustration, when used in this document, words such as "anticipate," "believe," "expect," "plan," "intend," "estimate," "project," "will," "should," "could," "may," "predict" and similar expressions are intended to identify forward-looking statements.

You should consider the following key factors when evaluating these forward-looking statements:

† fluctuations in worldwide prices of and demand for oil and natural gas;

† fluctuations in levels of oil and natural gas exploration and development activities;

† fluctuations in the demand for our services;

† the existence of competitors, technological changes and developments in the oilfield services industry;

† the existence of operating risks inherent in the oilfield services industry;

† the possibility of changes in tax and other laws and regulations;

† the possibility of political instability, war or acts of terrorism; and

† general economic conditions including the capital and credit markets.

The above description of risks and uncertainties is not all-inclusive, but highlights certain factors that we believe are important for your consideration. For a more detailed description of risk factors, please refer to Part I, Item 1A. - Risk Factors in our 2013 Annual Report.

Management Overview

This section is intended to help you understand our results of operations and our financial condition. This information is provided as a supplement to, and should be read in conjunction with, our consolidated financial statements and the accompanying notes thereto.

Nabors has grown from a land drilling business centered in the United States and Canada to a global business aimed at optimizing the entire well life cycle, with operations on land and offshore in most of the major oil and gas markets in the world. The majority of our business is conducted through two business lines:

Drilling & Rig Services

This business line is comprised of our global drilling rig operations and drilling-related services, consisting of equipment manufacturing, instrumentation optimization software and directional drilling services.

Completion & Production Services

This business line is comprised of our operations involved in the completion, life-of-well maintenance and eventual plugging and abandonment of a well. These product lines include stimulation, coiled-tubing, cementing, wireline, workover, well-servicing and fluids management.

Our businesses depend, to a large degree, on the level of spending by oil and gas companies for exploration, development and production activities. A sustained increase or decrease in the price of oil or natural gas could materially impact exploration, development and production activities of our customers and, consequently, our financial position, results of operations and cash flows.

Our customers' spending is determined principally by their internally generated cash flow and to a lesser extent by joint venture arrangements and funding from the capital markets. In our Drilling & Rig Services business line, operations have traditionally been driven by natural gas prices, but the majority of current activity is driven by the price of oil and to a lesser extent natural gas liquids


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from unconventional reservoirs (shales). Activity in our international markets is increasingly driven by the development of natural gas reserves. In our Completion & Production Services business line, operations are primarily driven by oil prices.

The following table sets forth oil and natural gas price data per Bloomberg for the 12-month periods ended March 31, 2014 and 2013:

                                       Three Months Ended March 31,
                                         2014                2013              Increase/(Decrease)

Average Henry Hub natural gas
spot price ($/thousand cubic
feet)                               $          5.16     $          3.01    $         2.15           71 %
Average West Texas intermediate
crude oil spot price ($/barrel)     $         98.65     $         91.94    $         6.71            7 %

Operating revenues and Earnings (losses) from unconsolidated affiliates for the three months ended March 31, 2014 totaled $1.6 billion, representing an increase of $48.8 million, or 3%, as compared to the three months ended March 31, 2013. Adjusted income derived from operating activities and net income (loss) from continuing operations for the three months ended March 31, 2014 totaled $109.0 million and $49.0 million ($0.16 per diluted share), respectively, representing decreases of 24% and 47%, respectively, compared to the three months ended March 31, 2013.

During the three months ended March 31, 2014, operating results reflected generally rising crude oil prices. Crude oil prices remain the primary driver of U.S. drilling activity. Our customers' financial results are benefitting from these higher prices, resulting, we believe, in increased drilling. Continued resilient crude oil prices could lead to increased domestic drilling activity for the balance of 2014. Although prices of natural gas and natural gas liquids in the U.S. have increased since early 2012, they remain at levels that negatively impact gas-directed drilling activity and we believe they would have to increase further in order for our customers to increase their gas-directed drilling activity significantly.

Our international markets have begun to respond to improving oil prices during the last two years. Several of our international markets have also begun to experience an increase in demand for drilling driven by increasing natural gas prices. Beginning in 2013, we signed agreements for several new and significantly upgraded drilling rigs, for both oil- and gas-directed drilling. We plan to deploy those rigs during 2014, and the combination of these deployments and rate increases commencing in 2014 should improve international results beginning in the second half of 2014.

The following tables set forth certain information with respect to our reportable segments and rig activity:

                              Three Months Ended March 31,
                                2014               2013               Increase/(Decrease)
                                           (In thousands, except percentages)

Operating revenues and
Earnings (losses) from
unconsolidated
affiliates: (1)

Drilling & Rig Services:
U.S.                       $       510,476    $       484,773    $       25,703              5 %
Canada                             111,621            126,867           (15,246 )          (12 )%
International                      375,069            321,516            53,553             17 %
Rig Services (2)                   143,726            134,231             9,495              7 %
Subtotal Drilling & Rig
Services (3)                     1,140,892          1,067,387            73,505              7 %
Completion & Production
Services:
Completion Services                227,899            262,138           (34,239 )          (13 )%
Production Services                275,400            251,571            23,829              9 %
Subtotal Completion &
Production Services (4)            503,299            513,709           (10,410 )           (2 )%

Other reconciling items            (57,018 )          (42,723 )         (14,295 )          (33 )%
Total (5)                  $     1,587,173    $     1,538,373    $       48,800              3 %


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                                     Three Months Ended March 31,
                                       2014               2013              Increase/(Decrease)
                                                 (In thousands, except percentages)
Adjusted income (loss) derived
from operating activities
(1) (6)

Drilling & Rig Services:
U.S.                              $        72,494    $        77,595    $       (5,101 )         (7 )%
Canada                                     26,160             30,518            (4,358 )        (14 )%
International                              48,119             21,469            26,650          124 %
Rig Services (2)                            8,728              1,287             7,441          578 %
Subtotal Drilling & Rig
Services (3)                              155,501            130,869            24,632           19 %
Completion & Production
Services:
Completion Services                       (33,635 )           17,756           (51,391 )       (289 )%
Production Services                        30,591             26,014             4,577           18 %
Subtotal Completion &
Production Services (4)                    (3,044 )           43,770           (46,814 )       (107 )%
Other reconciling items (5)               (43,416 )          (31,501 )         (11,915 )        (38 )%
Total adjusted income (loss)
derived from operating
activities                        $       109,041    $       143,138    $      (34,097 )        (24 )%




                                           Three Months Ended March 31,
                                             2014               2013              Increase/(Decrease)
                                                        (In thousands, except percentages)
Total adjusted income (loss) derived
from operating activities (6)           $       109,041    $       143,138    $      (34,097 )         (24 )%
Interest expense                                (44,810 )          (60,011 )          15,201            25 %
Investment income (loss)                            980             79,421           (78,441 )         (99 )%
Gains (losses) on sales and disposals
of long-lived assets and other income
(expense), net                                   (1,476 )          (59,737 )          58,261            98 %
Income (loss) from continuing
operations before income taxes                   63,735            102,811           (39,076 )         (38 )%
Income tax expense (benefit)                     14,008              9,854             4,154            42 %
Subsidiary preferred stock dividend                 750                750                 -             -
Income (loss) from continuing
operations, net of tax                           48,977             92,207           (43,230 )         (47 )%
Income (loss) from discontinued
operations, net of tax                            1,515              7,011            (5,496 )         (78 )%
Net income (loss)                                50,492             99,218           (48,726 )         (49 )%
Less:     Net (income) loss
          attributable to
          noncontrolling interest                  (573 )              (97 )            (476 )        (491 )%
Net income (loss) attributable to
Nabors                                  $        49,919    $        99,121    $      (49,202 )         (50 )%

Diluted earnings (losses) per share:
From continuing operations              $          0.16    $          0.31
From discontinued operations                          -               0.02
Total diluted                           $          0.16    $          0.33


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                                Three Months Ended March 31,
                                   2014              2013           Increase/(Decrease)
                                  (In thousands, except percentages and rig activity)
Rig activity:
Rig years: (7)
U.S.                                   206.6             189.6            17.0           9 %
Canada                                  43.8              40.0             3.8          10 %
International (8)                      129.8             122.7             7.1           6 %
Total rig years                        380.2             352.3            27.9           8 %
Rig hours: (9)
U.S. Production Services             209,982           212,298          (2,316 )        (1 )%
Canada Production Services            41,540            48,027          (6,487 )       (14 )%
Total rig hours                      251,522           260,325          (8,803 )        (3 )%



(1) All periods present the operating activities of our wholly owned oil and gas businesses, our previously held equity interests in oil and gas joint ventures in Canada and Colombia, aircraft logistics operations and construction services as discontinued operations.

(2) Includes our drilling technology and top drive manufacturing, directional drilling, rig instrumentation and software services. These services represent our other companies that are not aggregated into a reportable operating segment.

(3) Includes earnings (losses), net from unconsolidated affiliates, accounted for using the equity method, of ($2.5) million and $2.8 million for the three months ended March 31, 2014 and 2013, respectively.

(4) Includes earnings (losses), net from unconsolidated affiliates, accounted for using the equity method, of $0.1 million for each of the three months ended March 31, 2014 and 2013.

(5) Represents the elimination of inter-segment transactions and unallocated corporate expenses.

(6) Adjusted income (loss) derived from operating activities is computed by subtracting the sum of direct costs, general and administrative expenses, depreciation and amortization from the sum of Operating revenues and Earnings (losses) from unconsolidated affiliates. These amounts should not be used as a substitute for the amounts reported in accordance with GAAP. However, management evaluates the performance of our business units and the consolidated company based on several criteria, including adjusted income (loss) derived from operating activities, because it believes that these financial measures accurately reflect our ongoing profitability. A reconciliation of this non-GAAP measure to income (loss) from continuing operations before income taxes, which is a GAAP measure, is provided in the above table.

(7) Excludes well-servicing rigs, which are measured in rig hours. Includes our equivalent percentage ownership of rigs owned by unconsolidated affiliates. Rig years represent a measure of the number of equivalent rigs operating during a given period. For example, one rig operating 182.5 days during a 365-day period represents 0.5 rig years.

(8) Includes our equivalent percentage ownership of rigs owned by unconsolidated affiliates, which totaled 2.5 years during each of the three months ended March 31, 2014 and 2013.

(9) Rig hours represents the number of hours that our well-servicing rig fleet operated during the quarter.


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Segment Results of Operations

Drilling & Rig Services

This business line is comprised of our global drilling rig operations and drilling-related services, consisting of equipment manufacturing, instrumentation optimization software and directional drilling services.

Three Months Ended March 31,

                        2014               2013          Increase/(Decrease)
                      (In thousands, except percentages and rig activity)
U.S.
Revenues          $        510,476    $       484,773   $        25,703      5 %
Adjusted income   $         72,494    $        77,595   $        (5,101 )   (7 )%

Rig years                    206.6              189.6              17.0      9 %

Canada
Revenues          $        111,621    $       126,867   $       (15,246 )  (12 )%
Adjusted income   $         26,160    $        30,518   $        (4,358 )  (14 )%

Rig years                     43.8               40.0               3.8     10 %

International
Revenues          $        375,069    $       321,516   $        53,553     17 %
Adjusted income   $         48,119    $        21,469   $        26,650    124 %

Rig years                    129.8              122.7               7.1      6 %

Rig Services
Revenues          $        143,726    $       134,231   $         9,495      7 %
Adjusted income   $          8,728    $         1,287   $         7,441    578 %

U.S.

Our U.S. drilling segment includes land drilling activities in the lower 48 states, Alaska and offshore operations in the Gulf of Mexico.

Operating revenues increased during the three months ended March 31, 2014 compared to the corresponding 2013 period primarily as a result of an increase in drilling activity in the lower 48 states. This was partially offset by decreased drilling activity in offshore operations due to lower utilization of our MODS® Rigs. Adjusted income derived from operating activities decreased during the three months ended March 31, 2014 compared to the corresponding 2013 period due to slight decreases in average dayrates and increases in operating costs, in the lower 48 states.

Canada

Operating results decreased during the three months ended March 31, 2014 compared to the corresponding 2013 period primarily due to an unfavorable foreign exchange variance. In addition, revenue was unfavorably impacted by lower average drilling dayrates, partially offset by increased drilling activity. The Canadian dollar weakened approximately 10% against the U.S. dollar year-over-year. This negatively impacted margins, as both, revenues and expenses are denominated in Canadian dollars.

International

Operating results increased during the three months ended March 31, 2014 compared to the corresponding 2013 period primarily as a result of increased rig activity and higher dayrates from existing land rigs and deployments with higher margins in Northern Iraq, Abu Dhabi, Argentina and Papua New Guinea. These increases were partially offset by downtime associated with a rig in dry dock in Saudi Arabia and decreased land drilling activity in Mexico.


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Rig Services

Operating results increased during the three months ended March 31, 2014 compared to the corresponding 2013 period primarily due to higher capital equipment unit sales and higher ROCKITTM system sales. These increases were partially offset by continued decline in U.S. directional drilling due to intense competition. Adjusted income increased primarily due to cost reductions and higher service and rental margins at Canrig.

Completion & Production Services

This business line is comprised of our operations involved in the completion, life-of-well maintenance and eventual plugging and abandonment of a well. These product lines include stimulation, coiled-tubing, cementing, wireline, workover, well-servicing and fluids management.

                         Three Months Ended March 31,
                            2014               2013          Increase/(Decrease)
                          (In thousands, except percentages and rig activity)
Completion Services
Revenues              $        227,899    $       262,138   $      (34,239 )   (13 )%
Adjusted income       $        (33,635 )  $        17,756   $      (51,391 )  (289 )%
Production Services
Revenues              $        275,400    $       251,571   $       23,829       9 %
Adjusted income       $         30,591    $        26,014   $        4,577      18 %

Rig hours:
U.S.                           209,982            212,298           (2,316 )    (1 )%
Canada                          41,540             48,027           (6,487 )   (14 )%

Completion Services

Operating results for our U.S. operations decreased during the three months ended March 31, 2014 compared to the corresponding 2013 period, primarily due to the expiration of five multi-year take-or-pay contracts and reduced customer activity in part caused by severe weather in the Northeast and the Rocky Mountain operating areas. During the three months ended March 31, 2014, we experienced downward pricing pressure across most regions compared to the corresponding 2013 period due to continued overcapacity in the pressure pumping market.

Production Services

Operating results for our U.S. operations increased during the three months ended March 31, 2014 compared to the corresponding 2013 period, primarily due to incremental operating results from our acquisition of KVS during the fourth quarter of 2013. These increases were partially offset by decreasing operating results from our Canada operations, primarily due to the unfavorable impact of the foreign exchange rate and lower utilization from customers delaying the start of winter projects.


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OTHER FINANCIAL INFORMATION



                                              Three Months Ended March 31,
                                                2014               2013            Increase/(Decrease)
                                                         (In thousands, except percentages)

General and administrative expenses        $       134,266    $       130,878    $      3,388           3 %
As a percentage of operating revenue                   8.4 %              8.5 %           (.1 )%       (1 )%
Depreciation and amortization                      282,127            269,365          12,762           5 %
Interest expense                                    44,810             60,011         (15,201 )       (25 )%
Investment income                                      980             79,421         (78,441 )       (99 )%
Losses (gains) on sales and disposals
of long-lived assets and other expense
(income), net                                        1,476             59,737         (58,261 )       (98 )%

General and administrative expenses

General and administrative expenses increased slightly during the three months ended March 31, 2014 compared to the corresponding 2013 period. As a percentage of operating revenues, general and administrative expenses are comparable for each period and consistent with the slight increase in operating revenues during the three months ended March 31, 2014 as compared to the corresponding 2013 period.

Depreciation and amortization

Depreciation and amortization expense increased slightly during the three months ended March 31, 2014 compared to the corresponding 2013 period, as a result of the incremental depreciation expense from newly constructed rigs placed into service during 2013 in the U.S. and, to a lesser extent, rig upgrades and other capital expenditures made during 2013 relating to our Drilling & Rig Services business line in our U.S. and international markets.

Interest expense

Interest expense decreased during the three months ended March 31, 2014 compared to the corresponding 2013 period, as a result of the redemption of a portion of the principal amount of our 9.25% senior notes in September 2013, partially offset by the September 2013 issuances of our 2.35% and 5.10% senior notes. During the three months ended March 31, 2014, average interest rates were lower on our outstanding senior notes, revolving credit facility and commercial paper balances as compared to the corresponding 2013 period.

Investment income

Investment income for the three months ended March 31, 2014 included realized gains of $1.0 million attributable to interest and dividend income.

Investment income for the three months ended March 31, 2013 was $79.4 million, primarily attributable to $76.2 million in gains realized from the sale of certain available-for-sale securities. The balance was attributable to interest, dividend income or unrealized gains on the remaining portfolio of investments.

Gains (losses) on sales and disposals of long-lived assets and other income (expense), net

The amount of gains (losses) on sales and disposals of long-lived assets and other income (expense), net for the three months ended March 31, 2014 was a net loss of $1.5 million, which included increases to our litigation reserves of $3.1 million and net losses on sales and disposals of assets of approximately $2.4 million. These losses were partially offset by foreign currency exchange gains of approximately $3.3 million.

The amount of gains (losses) on sales and disposals of long-lived assets and other income (expense), net for the three months ended March 31, 2013 was a net loss of $59.7 million, which included a one-time stock grant valued at $27.0 million, which vested immediately and $18.0 million in cash awarded and paid to Mr. Petrello in connection with the termination of his prior employment agreement. In addition, there were increases to our litigation reserves of $6.2 million, foreign currency exchange losses of approximately $4.3 million and net losses on sales and disposals of assets of approximately $3.4 million.


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Income tax rate

Three Months Ended March 31, 2014 2013 Increase/(Decrease)

Effective income tax
rate from continuing
operations 22 % 10 % 12 % 513% 120 %

The changes in our effective tax rate during the three months ended March 31, 2014 compared to the corresponding 2013 period reflects the proportion of income generated in the United States versus other countries where we operate. Income generated in the United States is generally taxed at a higher rate than other jurisdictions.

We are subject to income taxes in the United States and numerous other jurisdictions. Significant judgment is required in determining our worldwide provision for income taxes. One of the most volatile factors in this determination is the relative proportion of our income or loss being recognized in high- versus low-tax jurisdictions. In the ordinary course of our business, there are many transactions and calculations for which the ultimate tax determination is uncertain. We are regularly audited by tax authorities. Although we believe our tax estimates are reasonable, the final outcome of tax . . .

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